Exxon exploration deal with Kurds infuriates Baghdad

The great Iraqi oil rush has started to exacerbate dangerous communal tensions after a major oil company ignored the wishes of the central Government in Baghdad and decided to do business with its main regional rival.

The bombshell exploded last month when Exxon Mobil, the world's largest oil company, defied the instructions of the Baghdad Government and signed a deal with the Iraqi Kurds to search for oil in the northern area of Iraq they control.

To make matters worse, three of the areas Exxon has signed up to explore are on territory the two authorities dispute.

The Government must now decide if it will retaliate by kicking Exxon out of a giant oilfield it is developing in the south of Iraq.

Political leaders in Baghdad say the company is putting the unity of their country at risk. Hussain Shahristani, the Deputy Prime Minister in charge of energy matters, said that any oil or gas field development contract in Iraq needed the approval "of the federal Government, and any contract that has not been presented to the federal Government has no standing and the companies are not advised to work on Iraqi territory in breach of Iraqi laws".

Baghdad has had oil disputes before with the Kurdistan Regional Government (KRG), but the present row is far more serious because it is the first time "Big Oil" has moved into Kurdistan, showing that at least one of the major oil companies is prepared to disregard threats from the Government of Nouri al-Maliki.

"Exxon Mobil was aware of the position of the Iraqi Government," said Shahristani, a former nuclear scientist who was tortured and imprisoned by Saddam Hussein.

"We hear from the American Government that they've advised all American companies, including Exxon Mobil, that contracts should not be signed without the approval of the federal Government."

Observers were surprised that Exxon was prepared to hang its future in Iraq on the outcome of the power struggle between Iraqi Kurdistan and the central Government. Control of the right to explore for oil and exploit it is crucial to the authorities on both sides since they have no other source of revenue.

The Kurds have won a degree of autonomy close to independence since the fall of Saddam, and the ability to sign oil contracts without reference to Baghdad will be another step towards practical independence and the break-up of Iraq. What makes the Exxon-KRG deal particularly inflammatory, Shahristani said, was that three of the six areas where Exxon is planning to drill were "across the blue line" - that is, outside the border of the KRG.

That put them in large areas in northern Iraq disputed between Arabs and Kurds and where the Kurds have military control.

The Government must now decide if it will make good on its threats and replace Exxon at a mammoth oil field called West Qurna 1 at the other end of the country, north of Basra. Iraqi oil officials hint that Royal Dutch Shell might replace the American company.

Both sides have much at stake. The Iraqi Government is totally reliant on its oil revenues to pay its soldiers, police force and civilian officials.

It needs vast sums to rebuild the country after 30 years of war, civil war and sanctions. In 2009, it began to expand its oil industry by signing contracts with firms such as BP, Royal Dutch Shell and Exxon to boost production in under-exploited and poorly maintained fields.

These companies thereby gained access to some of the largest fields in the world, each with reserves of more than five billion barrels.

Vast sums are being invested, mostly around Basra in the south of Iraq.

Shahristani is pleased with progress so far, saying that what "we are doing in Basra is at least five times larger than the largest oil projects in the history of the oil industry so far."

Iraqis are split on whether Exxon is being cunning or naive. One explanation is that the oil company feels so powerful, or so essential to Iraqi oil development, that it can disregard the Iraqi Government.

An alternative argument is that Exxon is dissatisfied with the West Qurna 1 deal and so does not mind walking away from it and looking for oil elsewhere.

A third is that the company got suckered by the Kurds.

Iraqi Arabs know that the Iraqi Kurds want to control as much of Iraq's oil reserves as possible to buttress their independence.

Less easy to understand is why Exxon should willingly make its activities a central issue in the Arab-Kurdish confrontation which has for so long destabilised Iraq.

- INDEPENDENT